Buying a Home: Why Does Your Credit Score Matter?
A credit score is undoubtedly the biggest criteria considered by lenders during your mortgage application process. It is that element of your home buying process that can make or break your wish of buying a dream house. Just three digits can mean a whole difference in moving into your new house or finding another overpriced rental unit. In short, these tiny digits can make a all the difference between a yes and no.
Does my credit score qualify me for a mortgage or not?
This is the fundamental question that continues to bother homebuyers until they are rewarded with a mortgage approval. In the home buying industry, it is a common trend that anyone having a good credit score can obtain a mortgage.
This is because credit scores are actually a measure of a person’s discipline and ability towards the fulfillment of debt obligations. If you have a higher credit score, it is a reflection of your higher creditworthiness among other borrowers.
Nonetheless, a credit score matters in your home buying process for many reasons including;
Credit Score Affects Your Debt-to-Income Ratio
To ascertain your eligibility for a mortgage, a credit score is usually combined with a thorough analysis of your total income and debt-to-income ratio. This indicates the portion of your monthly income that goes towards repayment of your debts.
If a home buyer has a high debt-to-income ratio, it means that the lender would be hesitant of buyer’s ability to meet mortgage obligations. But if you have a high debt ratio along with high credit score, it demonstrates your discipline as well as sound financial management skills.
Credit Score and the Mortgage Rate
In addition to determining the ability of a homebuyer, a credit score may also affect the mortgage rate. A mortgage rate is the amount of interest you will have to pay for the loan. Thus, most homebuyers wish to qualify for a lower interest rate.
Typically, lenders associate a higher credit score with lower borrowing risk. As a result, these borrowers qualify for a higher mortgage loan. Borrowers also qualify for lower interest rates, as low risk is attached with the loan.
Your Credit Score Demonstrate Your Creditworthiness
Another reason why your credit score plays a critical role is that lenders closely monitor it. It is a buyer’s comprehensive report that demonstrates his/her ability to meet loan obligations. The report is generated on the basis of different loans already taken such as car loans, credit card transactions and other mortgages.
This means that your lender can easily get insightful information with regards to your financial history. The lender simply does this by examining your current credit score.
When you hand over your portfolio of information, representing your years of financial transactions, you allow the lender to gain a complete understanding of your current financial state and decide on your eligibility for a higher mortgage loan.
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